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The CFPB has issued its fourth annual FDCPA report covering the CFPB’s activities in 2014. The section of the report that reviews consumer complaints about debt collection received by the CFPB in 2014 recycles information contained in the CFPB’s latest Consumer Response Annual Report.

In the section of the report about the CFPB’s supervision of debt collectors that qualify as “larger participants,” the CFPB describes FDCPA violations found by its examiners including:

Excessive or inconveniently timed telephone calls

Misleading representations in collection litigation, such as findings by CFPB examiners that one or more entities would dismiss 70% of the lawsuits they filed when the consumer filed an answer because the entities could not locate supporting documentation

False threats of litigation

Prohibited disclosures to third parties, with CFPB examiners finding that one or more collectors had provided faulty training materials that resulted in their representatives regularly identifying their employers to third parties without being expressly requested to do so

False and misleading representations in debt collection communications (which included misrepresentations regarding the benefits of participating in a federal student loan rehabilitation program made by debt collectors collecting defaulted student loans for the Department of Education as previously described in the CFPB’s Winter 2015 Supervisory Highlights.)

With regard to the CFPB’s debt collection rulemaking efforts, the report discusses the CFPB’s review of the more than 23,000 comments it received in response to its November 2013 Advance Notice of Proposed Rulemaking. According to the CFPB, the “broad themes” it has identified from the comments include:

The need to address use of newer technologies such as e-mail under the FDCPA

Issues relating to the transfer of information when debts are sold, including whether certain types of debt, like medical or student loan debt, should require more or less documentation

Whether debt collection rules should apply to first party collectors

While Director Cordray states in his introductory message that the CFPB “is making progress” on developing rules, no timetable is given. The report indicates only that prior to completing its review of the comments and issuing a notice of proposed rulemaking, the CFPB “may convene” a small business review panel pursuant to the Small Business Regulatory Enforcement Fairness Act.

The report also describes the seven public enforcement actions announced by the CFPB in 2014 “related to unfair, deceptive and abusive debt collection,” and indicates that these actions have so far resulted in over $570 million in consumer relief and over $13 million in civil money penalties. (Among these enforcement actions are the CFPB’s actions against ACE Cash Express, Fredrick J. Hanna & Associates, Colfax Capital Corporation, and Freedom Stores.) According to the report, in addition to these seven actions, “the Bureau is conducting a number of non-public investigations of companies to determine whether they engaged in collection practices that violate the FDCPA or the Dodd-Frank Act.”

On March 26, the CFPB held a public hearing on payday and auto title lending, the same day that it released proposed regulations for short-term small-dollar loans. Virginia Attorney General, Mark Herring gave opening remarks, during which he asserted that Virginia is perceived as the “predatory lending capital of the East Coast,” suggesting that payday and auto title lenders were a large part of the problem. He said that his office would target these lenders in its efforts to curb alleged abuses. He also announced several initiatives aimed at the industry, including enforcement actions, education and prevention, legislative proposals, a state run small-dollar loan program, and an expanded partnership with the CFPB. The Commissioner of Virginia’s Bureau of Financial Institutions, E. Joseph Face, also gave brief remarks echoing those of the Attorney General.

Richard Cordray, director of the CFPB, then gave lengthy remarks, which were published online the morning before the hearing took place and are available here. His remarks outlined the CFPB’s new “Proposal to End Payday Debt Traps.” Cordray explained and defended the CFPB’s proposed new regulations. While most of what he said was repetitive of the lengthier documents that the CFPB published on the topic, a few lines of his speech revealed the impetus behind the CFPB’s proposed regulations and one reason why they are fundamentally flawed.

In discussing the history of consumer credit, he stated that “[t]he advantage[, singular] of consumer credit is that it lets people spread the cost of repayment over time.” This, of course, ignores other advantages of consumer credit, such as closing time gaps between consumers’ income and their financial needs. The CFPB’s failure to recognize this “other” advantage of consumer credit is a driving force behind several flaws in the proposed regulations, which we have been and will be blogging about.

Following the opening remarks, the CFPB moderated a panel discussion during which participants from industry and consumer advocacy groups had the opportunity to comment on the proposed regulations and answer questions. The CFPB panel included:

After the panelists’ opening remarks, they answered questions posed by the CFPB such as: (i) What should the role of “ability to repay” standards be in the payday loan market?; (ii) How do payday loans’ rollover feature impact the ability to repay?; and (iii) “What is the appropriate balance between protecting consumers and ensuring that they have access to credit?”

Not surprisingly, in answering these questions, the consumer advocate panel took every opportunity to condemn payday and auto title products. They generally cited anecdotal evidence of consumers who became financially and emotionally distressed when they found themselves unable to repay their loans. One panelist purported to cite “data” compiled by his own organization in support of the proposed regulations. Unfortunately, these consumer advocates offered no viable alternatives to payday and auto title products to help consumers who find themselves in need of money and with nowhere else to turn.

The industry panelists generally expressed concern over the CFPB’s proposed regulations. Ms. McGreevy, speaking for online lenders, stated that any new regulations should not stifle innovation, rely on outdated underwriting methods, or dictate when consumers would be allowed to take out a loan. All of the industry panelists, in some way or another, expressed concern that new regulations not be implemented in a way that defeats the purposes of payday and auto title products. If, for example, the new regulations dramatically increase the time it takes to get a loan, they may strip away the value that these loans provide to consumers who need them.

After the panel concluded, the CFPB entertained comments from approximately 40 members of the public who had registered in advance. The speakers were each afforded one minute to comment. Employees of payday and auto title loan stores made up the largest group of speakers, followed closely clergy and consumer advocacy groups. A fair number of consumers also made remarks. One consumer claims to have taken out a $300 loan on which she now owes more than $5,000. Others expressed gratitude towards the payday and auto title lenders whose loans allowed them to stay out of financial peril or to respond to an emergency situation.

The report provides data on the most common types of complaints for each product, the handling of complaints, and median monetary relief. Of the 250,200 complaints received in 2014, approximately 67% were received through the CFPB’s website, 9% via telephone calls, 15% via referrals from other agencies and regulators, and the balance via mail, e-mail and fax. Based on the CFPB’s breakdown of the number of complaints received in each category, debt collection (88,300), mortgages (51,200), and credit reporting (44,800) accounted for 73% of all 2014 complaints. Debt collection and credit reporting complaints had the largest increases from 2013 (when the number of complaints received was, respectively, 31,100 and 24,200). Also, while in 2013 the CFPB received the most complaints about mortgages, it received substantially more complaints in 2014 about debt collection than mortgages.

The 2014 report includes a section entitled “Credit Reporting Case Study” in which the CFPB provides further analysis about the credit reporting complaints it received. According to the CFPB, the factors that may have contributed to the 85% increase in credit reporting complaints from 2013 to 2014 include “increased consumer access and awareness about credit reporting issues.” The portion of that section entitled “Investigator Observations” appears intended to highlight issues on which CFPB examiners are likely to focus. These issues include:

Credit report accuracy. The CFPB indicates that a large number of complaints concern the accuracy of public records, such as bankruptcies, judgments, and tax liens. (The CFPB notes that a large portion of judgments involve debt collection lawsuits.) According to the CFPB, consumers frequently complain that public records contained on their credit reports are not updated in a timely manner and consumers also emphasize the difficulties that they experience when attempting to remedy errors.

Student loan issues. The CFPB observes that it receives a significant number of complaints about the inaccurate reporting of student loans, with consumers often reporting that the original loans were still reported as open after their loans were transferred from one servicer to the other, conveying the impression that consumers have more student loans than they actually did. Other issues noted by the CFPB include: forgiven loans not being reported as closed, incorrect loan balances or terms, and incorrect reporting of consolidated loans as multiple individual loans. The CFPB also highlights complaints by consumers about significant drops in their credit scores when one missed payment resulted in several delinquencies being reported, incorrect disbursement of payments by loan servicers, and
co-signers not receiving notice that negative information would be reported on their account as a result of the primary borrower’s failure to make payments.

As he did in last year’s report, Director Cordray describes complaints as a “compass to direct our work and help us identify and prioritize problems for potential supervisory, enforcement, and regulatory action.” Because they are often invalid, complaints do not serve as reliable evidence that the complained about conduct occurred. The CFPB’s recent decision to publicly disclose consumer narratives only increases the potential for reputational damage from the publication of unverified complaints. We continue to hope the CFPB will be mindful of the shortcomings of complaints when using them as a “compass” in its decision-making process.

On March 26th, the Community Financial Services Association (“CFSA”) held a press call to address the CFPB’s rulemaking process for developing payday loan regulations. CFSA Chief Executive Officer Dennis Shaul offered brief opening remarks before answering questions from the press immediately prior to a CFPB field hearing on payday loans being held in Richmond, VA.

In a statement released prior to the call, Shaul emphasized that, “CFSA welcomes the CFPB’s consideration of the payday loan industry and we are prepared to entertain reforms to payday lending that are focused on customers’ welfare and supported by real data.” Shaul called on the CFPB to develop data indicating what percentage of customers benefit from their use of payday loans and use this number as a basis for comparison against the percentage of customers that experience the “payday debt traps” as described by CFPB Director Richard Cordray. Shaul expressed concerns about the impact of any CFPB regulations that could negatively impact customers that are well-served by payday loans.

Shaul also called on the CFPB to serve as an “honest umpire” between the payday loan industry and consumer advocates. Shaul noted that the rulemaking process should not become, “a contest between those who favor and those who oppose payday loans, but what is best for customers.”

The CFPB’s outline of proposals for the upcoming Small Business Advisory Review Panel acknowledges that the CFPB’s proposals will result in lost volume, principal, and revenue for lenders and will likely drive some lenders out of the market or cause substantial consolidation among existing market participants. Shaul stated that driving choices out of the market does not serve business or customers.

The CFPB has moved a step closer to issuing payday loan rules by releasing a press release, factsheet and outline of the proposals it is considering in preparation for convening a small business review panel required by the Small Business Regulatory Enforcement Fairness Act and Dodd-Frank. The CFPB’s proposals are sweeping in terms of the products they cover and the limitations they impose. In addition to payday loans, they cover auto title loans, deposit advance products, and certain “high cost” installment and open-end loans. In this blog post, we provide a detailed summary of the proposals. We will be sharing industry’s reaction to the proposals as well as our thoughts in additional blog posts.

When developing rules that may have a significant economic impact on a substantial number of small businesses, the CFPB is required by the Small Business Regulatory Enforcement Fairness Act to convene a panel to obtain input from a group of small business representatives selected by the CFPB in consultation with the Small Business Administration. The outline of the CFPB’s proposals, together with a list of questions on which the CFPB seeks input, will be sent to the representatives before they meet with the panel. Within 60 days of convening, the panel must issue a report that includes the input received from the representatives and the panel’s findings on the proposals’ potential economic impact on small business.

The contemplated proposals would cover (a) short-term credit products with contractual terms of 45 days or less, and (b) longer-term credit products with an “all-in APR” greater than 36 percent where the lender obtains either (i) access to repayment through a consumer’s account or paycheck, or (ii) a non-purchase money security interest in the consumer’s vehicle. Covered short-term credit products would include closed-end loans with a single payment, open-end credit lines where the credit plan terminates or is repayable in full within 45 days, and multi-payment loans where the loan is due in full within 45 days.

Account access triggering coverage for longer-term loans would include a post-dated check, an ACH authorization, a remotely created check (RCC) authorization, an authorization to debit a prepaid card account, a right of setoff or to sweep funds from a consumer’s account, and payroll deductions. A lender would be deemed to have account access if it obtains access before the first loan payment, contractually requires account access, or offers rate discounts or other incentives for account access. The “all-in APR” for longer-term credit products would include interest, fees and the cost of ancillary products such as credit insurance, memberships and other products sold with the credit. (The CFPB states in the outline that, as part of this rulemaking, it is not considering proposals to regulate certain loan categories, including bona-fide non-recourse pawn loans with a contractual term of 45 days or less where the lender takes possession of the collateral, credit card accounts, real estate-secured loans, and student loans. It does not indicate whether the proposal covers non-loan credit products, such as credit sale agreements.)

The contemplated proposals would give lenders alternative requirements to follow when making covered loans, which vary depending on whether the lender is making a short-term or longer-term loan. In its press release, the CFPB refers to these alternatives as “debt trap prevention requirements” and “debt trap protection requirements.” The “prevention” option essentially requires a reasonable, good faith determination that the consumer has adequate residual income to handle debt obligations over the period of a longer-term loan or 60 days beyond the maturity date of a short-term loans. The “protection” option requires income verification (but not assessment of major financial obligations or borrowings), coupled with compliance with specified structural limitations.

For covered short-term loans (and longer-term loans with a balloon payment more than twice the level of any prior installment), lenders would have to choose between:

Prevention option. A lender would have to determine the consumer’s ability to repay before making a short-term loan. For each loan, a lender would have to obtain and verify the consumer’s income, major financial obligations, and borrowing history (with the lender and its affiliates and with other lenders.) A lender would generally have to adhere to a 60-day cooling off period between loans (including a loan made by another lender). To make a second or third loan within the two-month window, a lender would need to have verified evidence of a change in the consumer’s circumstances indicating that the consumer has the ability to repay the new loan. After three sequential loans, no lender could make a new short-term loan to the consumer for 60 days. (For open-end credit lines that terminate within 45 days or are fully repayable within 45 days, the CFPB would require the lender, for purposes of determining the consumer’s ability to repay, to assume that a consumer fully utilizes the credit upon origination and makes only the minimum required payments until the end of the contract period, at which point the consumer is assumed to fully repay the loan by the payment date specified in the contract through a single payment in the amount of the remaining balance and any remaining finance charges. A similar requirement would apply to ability to repay determinations for covered longer-term loans structured as open-end loans with the additional requirement that if no termination date is specified, the lender must assume full payment by the end of six months from origination.)

Protection option. Alternatively, a lender could make a short-term loan without determining the consumer’s ability to repay if the loan (a) has an amount financed of $500 or less, (b) has a contractual term not longer than 45 days and no more than one finance charge for this period, (c) is not secured by the consumer’s vehicle, and (d) is structured to taper off the debt.

The CFPB is considering two tapering options. One option would require the lender to reduce the principal for three successive loans to create an amortizing sequence that would mitigate the risk of the borrower facing an unaffordable lump-sum payment when the third loan is due. The second option would require the lender, if the consumer is unable to repay the third loan, to provide a no-cost extension that allows the consumer to repay the third loan in at least four installments without additional interest or fees. The lender would also be prohibited from extending any additional credit to the consumer for 60 days.

Although a lender seeking to utilize the protection option would not be required to make an ability to repay determination, it would still need to apply various screening criteria, including verifying the consumer’s income and borrowing history and reporting the loan to all commercially available reporting systems. In addition, the consumer could not have any other outstanding covered loans with any lender, rollovers would be capped at two followed by a mandatory 60-day cooling-off period for additional loans of any kind from the lender or its affiliate, the loan could not result in the consumer’s receipt of more than six covered short-term loans from any lender in a rolling 12-month period, and after the loan term ends, the consumer cannot have been in debt for more than 90 days in the aggregate during a rolling 12-month period.

For covered longer-term loans, lenders would have to choose between:

Prevention option. Before making a fully amortizing covered longer-term loan, a lender would have to make essentially the same ability to repay determination that would be required for short-term loans, over the term of the longer-term loan. In addition, an ability to repay determination would be required for an extension of a covered longer-term loan, including refinances that result in a new covered longer-term loan. To extend the term of a covered longer-term loan or refinance a loan that results in a new covered longer-term loan (including the refinance of a loan from the same lender or its affiliate that is not a covered loan), if certain conditions exist that indicate the consumer was having difficulty repaying the pre-existing loan (such as a default on the existing loan), the lender would also need verified evidence that there had been a change in circumstances that indicates the consumer has the ability to repay the extended or new loan. Covered longer-term loans with balloon payments are treated the same as short-term loans.

Protection option. The CFPB is considering two alternative approaches for a lender to make a longer-term loan without determining the consumer’s ability to repay. Under either approach, the loan term must range from a minimum of 45 days to a maximum of six months and fully amortize with at least two payments.

The first approach is based on the National Credit Union Administration’s program for payday alternative loans, with additional requirements imposed by the CFPB. The NCUA program would limit the loan’s terms to (a) a principal amount of not less than $200 and not more than $1,000, and (b) an annualized interest rate of not more than 28% and an application fee of not more than $20, reflecting the actual cost of processing the application. Under the NCUA’s screening requirements, the lender would have to use minimum underwriting standards and verify the consumer’s income. The CFPB would also require the lender to verify the consumer’s borrowing history and report use of the loan to all applicable commercially available reporting systems and would prohibit the lender from making the loan if the consumer has any other outstanding covered loan or the loan would result in the consumer having more than two such loans during a rolling six-month period. Under this alternative, a lender that holds a consumer’s deposit account would not be allowed to fully sweep the account to a negative balance, set off from the consumer’s account to collect on the loan in the event of delinquency, or close the account in the event of delinquency or default.

The second approach limits each periodic payment to 5 percent of the consumer’s expected gross income over the payment period. No prepayment fee could be charged. The lender would also have to verify the consumer’s income and borrowing history and report use of the loan to all applicable commercially available reporting systems. In addition, the consumer must not have any other outstanding covered loans or have defaulted on a covered loan within the past 12 months and the loan cannot result in the consumer being in debt on more than two such loans within a rolling 12-month period.

Restrictions on collection practices. For all covered short-term and longer-term loans, lenders would be subject to the following restrictions:

Advance notice of account access. A lender would be required to provide three business days advance notice before attempting to collect payment through any method accessing an account, including ACH entries, post-dated signature checks, RCCs, and payments run through the debit networks. The notice would have to include information such as the date of the payment request, payment channel, payment amount (broken down by principal, interest and fees), and remaining loan balance. Notice by email would generally be permitted.

Limit on collection attempts. If two consecutive attempts to collect money from a consumer’s account made through any channel are returned for insufficient funds, the lender would not be allowed to make any further attempts to collect from the account unless the consumer provided a new authorization.

Effective March 25, 2015, the sale of condominium units are no longer subject to the registration requirements of the Interstate Land Sales Full Disclosure Act (ILSA) under a new exemption. This new exemption applies only to the sale of condominium units on and after March 25, 2015, but also will include condominium units within projects currently registered with the CFPB that are offered for sale on and after March 25. (Dodd-Frank gave the CFPB rulemaking and other authority under ILSA.)

The new exemption, however, is not a complete exemption from ILSA. Unless another full exemption applies, the sale of condominium units remains subject to the law’s antifraud provisions. For more on the sales exemption and how ILSA’s antifraud provisions may continue to apply, see our legal alert.

Additional clarity is needed in the definition of the term “prepaid account” to avoid banks being subject to second-guessing by examiners and plaintiffs’ attorneys. The ABA recommends that the CFPB narrow the definition of prepaid account to cover an account whose underlying funds are only accessed through a card (or card number) that is processed through the card networks.

The proposed treatment of overdrafts linked to prepaid accounts as open-end credit under Regulation Z is contrary to law because TILA’s definition of “credit” clearly excludes overdrafts, which convey no “right to defer” payment, the essential characteristic of credit under TILA.

The proposal amounts to an effective ban on offering overdraft services or credit through a prepaid card because of the operational and compliance costs and risks. As a result, it will harm consumers by limiting consumer access to overdraft services and credit. The proposal also hobbles efforts of banks to offer small-dollar affordable credit as an alternative to nonbank small-dollar loans such as payday loans.

The proposal will even affect prepaid cards that do not offer overdraft services because it transforms prepaid cards into credit cards if any fee is charged when the account is in overdraft status—even if the overdraft is unavoidable, for example, when a deposited check is returned unpaid or the final card transaction exceeds the amount authorized. Although ABA member banks that offer prepaid cards generally do not offer overdraft or credit services with their prepaid cards, the proposal exposes them to new operational and compliance risks associated with application of the proposed credit and overdraft rules to their current products. The new regulatory risks and costs may cause these banks to withdraw from the market for prepaid products and the ABA anticipates that the proposal will make other banks, particularly community banks, reluctant to enter the market.

By significantly hindering banks’ ability to offer prepaid cards, the proposal will suppress the opportunity for prepaid cards to serve as a promising “bank account” alternative for low-income customers or those without bank accounts.

By allowing holders of prepaid accounts to overdraw an account and avoid not only overdraft fees, but potentially any fee, including those regularly assessed on the account, the proposal will cause prepaid cards to lose their usefulness as a starting ramp to greater financial responsibility and increased access to banking services. Instead of encouraging customers to improve their financial management skills, the prepaid account contemplated by the CFPB’s proposal would send a message that there are few adverse consequences to overspending or not managing finances. Consumers, in the long term, will be ill-served by this message as it will lead to poor financial decisions with regard to bank accounts and other financial products.

The ABA also urges the CFPB to set an effective date that is no sooner than 18 months after adoption of a final rule rather than nine months after adoption as the CFPB has proposed.

The Office of Inspector General (OIG) has added a new ongoing CFPB project to its work plan updated as of March 13, 2015. The OIG is auditing the CFPB’s compliance with the Improper Payments Information Act of 2002, as amended by the Improper Payments Elimination and Recovery Act of 2010 and the Improper Payments Elimination and Recovery Improvement Act of 2012.

The law requires an agency to perform an annual review of its programs and activities and identify those programs and activities that are susceptible to significant improper payments. (An improper payment is generally any payment that should not have been made or that was made in an incorrect amount under statutory, contractual, administrative, or other legally applicable requirements.) An agency must estimate the amount of improper payments and implement a program to reduce them. It must also file reports with the President and Congress and the Office of Management and Budget that include the estimates, steps taken by the agency to reduce improper payments, the amount of improper payments the agency expects to recover, and how it plans to go about recovering such amount.

Another Republican CFPB effort to subject the CFPB to the congressional appropriations policy took the form of an amendment to the Senate’s 2015 Budget Resolution introduced last week by Senator David Perdue. Earlier in March, Republican Congressman Sean Duffy introduced the Bureau of Consumer Financial Protection Accountability Act of 2015 (H.R. 1261) which is also directed at making the CFPB subject to the congressional appropriations process. (Dodd-Frank entitles the CFPB to receive annual funding through transfers from the Fed that are capped at a fixed percentage of the Fed’s total 2009 operating expenses.)

We recently wrote about three studies that cast serious doubt on the benefit to payday loan borrowers of an ability-to-repay requirement, a payment-to-income (PTI) ratio ceiling, and rollover limits, three potential payday loan restrictions thought to be under consideration by the CFPB.

The findings of these studies find support in another study released this week by Navigant Economics entitled “Small-Dollar Installment Loans: An Empirical Analysis.” The study was conducted by Dr. Howard Beales, a professor in the George Washington School of Business, and Dr. Anand Goel of Navigant Economics. Dr. Beales is a former Director of the FTC’s Bureau of Consumer Protection.

The study analyzed 1.02 million installment loans made in 16 states by four companies between January 2012 and September 2013. 55% of these loans were storefront loans and 45% were online loans. The loans had the following additional characteristics:

An average loan amount of $1,192 and a median loan amount of $900

An average loan term of 221 days and a median term of 181 days

An average APR of 300% and a median APR of 295%

Median gross annual income of borrowers was $35,057

The study made the following key findings:

Affordability criteria, such as a PTI ratio limit, risks a substantial reduction in credit availability to the small-dollar credit population, which often has few available alternatives. The study found, for example, that a 5% PTI ratio limit would limit access to credit for 86% of current borrowers. (Of the loans analyzed for which PTI ratios were available, only 14% had a ratio of less than 5%.)

A PTI ratio is a poor metric for predicting loan repayment.

Those who borrow repeatedly are more likely to repay their loans on average and repeat borrowers with the same lender are offered lower interest rates, presumably because they are considered less risky than when the initial loan was made. Thus, additional loans from the same lender appear to reflect a willingness to extend more credit to borrowers who have demonstrated they can handle their obligations rather than a debt trap.

The negligible reduction in default rates resulting from a PTI ratio limit is more than offset by the resulting reduction in credit access.

As it moves forward in the payday loan rulemaking process, we hope the CFPB will carefully consider this growing body of research indicating that the payday loan limits typically advocated by consumer groups could be detrimental to borrowers

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